In the Spotlight An industry focus on the Communications

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In the Spotlight
An industry focus on the
impact of IFRS 16 –
Communications
March 2016
IFRS 16, ‘Leases’
The new lease accounting standard will fundamentally change the accounting for
lease transactions and is likely to have significant business implications.
Almost all leases will be recognised on the balance sheet, with a right of use asset and
financial liability that recognise more expenses in profit or loss during the earlier life
of a lease.
This will have an associated impact on key accounting metrics, and clear
communication will be required to explain the impact of changes to stakeholders.
Why the new standard matters to the industry

Most Communications companies enter into lease agreements both as
lessors and lessees. While lessor accounting remains largely unchanged
under IFRS 16, leases in the industry are prevalent. The new standard is
likely therefore to have a material impact for Communications companies.

Typical areas where the standard will have a significant impact are
- arrangements with other operators;
- shared network assets arrangements;
- arrangements where network equipment is embedded in the supply of
communication services; and
- leases of network sites and retail space.
In respect of leases embedded within service arrangements the application
of IFRIC 4 has historically been a judgmental area in the industry. For
many, the embedded lease was generally viewed as an operating
arrangement which typically did not impact the Income Statement profile.
IFRS 16 brings in new conditions to be assessed in the determination of
whether the agreement contains a lease which may impact current
industry custom and practice.


The PwC Global Lease Capitalisation study published in February 2016
indicated that there would be a median debt increase of 21% for
Communications companies (due to the recognition of lease liabilities).
An In depth guide to the new standard and its effects
In depth INT 2016-01 provides a comprehensive analysis of the new standard.
This Spotlight summarises the main aspects of the standard, highlighting some key
challenges and questions management should ask as they prepare for transition.
Although the new standard will not be effective until 2019, the extent of datagathering and requirement to embed new processes for many entities means that, for
many, preparations should begin now.
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. © 2016 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is
a separate legal entity. Please see www.pwc.com/structure for further details.
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The new standard on a page
When is the
The new leasing standard will become effective in 2019
effective date?
and include pre-existing leases (however, there are some
reliefs on transition).
What is the scope of
the standard?
The standard covers every lease except for
rights to explore non-regenerative resources, rights held
under certain licensing agreements, leases of biological
assets and service concession arrangements.
For lessors, licences of intellectual property granted are
excluded from IFRS 16.
Are there any
exemptions?
A recognition and measurement exemption for short
term leases and leases of low value assets is available as a
policy choice. However, this is only available to the lessee.
What is the
definition of a
lease?
A lease is a contract (or part of a contract) that conveys
the right to use an asset for a period of time in exchange
for consideration.
A contract contains a lease if fulfilment depends on an
identified asset and it conveys the right to control the use
of that identified asset throughout the period of use.
Each lease component should be identified and accounted
for separately.
What is an
identified asset?
An asset can be identified explicitly or implicitly. A
contract does not depend on an identified asset if the
supplier has a substantial right to substitute the asset.
What is the “right
to control the use”
of an asset?
A customer has the right to control the use of an
identified asset if they have the right to obtain
substantially all of the economic benefits from the use of
the asset and the right to direct the use of the asset, i.e. to
decide how and for what purpose it is used.
When is an
arrangement split
into separate lease
components?
A right to use an asset is a separate lease component if the
lessee can benefit from the asset on its own (or together
with readily available resources) and the asset is neither
interdependent nor highly correlated with any other
underlying asset in the contract.
What is recognised
on the balance
sheet?
Lessees will recognise almost all leases on the balance
sheet (as a “right-of-use asset” and “lease liability”).
Lessors will still distinguish between finance leases
(recognise a lease receivable) and operating leases
(continue to recognise the underlying asset).
How is a lease
initially measured
by lessees?
The lessee recognises:
 a lease liability at the present value of future lease
payments; and
 a right-of-use asset to an equal amount plus initial
direct costs.
What does a lessee
recognise in profit
or loss?
A lessee will recognise:
 interest on the lease liability
 depreciation of the right of use asset
Variable lease payments not included in the lease liability
are recognised in the period the obligation is incurred.
Is lessor accounting
affected?
IFRS 16 does not change lessor accounting.
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. © 2016 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is
a separate legal entity. Please see www.pwc.com/structure for further details.
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Key questions for the industry
Q:
What types of arrangements might meet the new definition of a lease?
A:
Arrangements with other operators could include – Indefeasible Rights of
Use, leased circuits, network purchase or leasing arrangements, the
leasing of space or capacity in exchanges and at other network sites.
Arrangements involving shared assets could include tower site, co-location
and radio access network sharing agreements.
Arrangements which may contain leases could include – customer
contracts for using identified network or infrastructure equipment,
equipment provided to customers through which the operator delivers
communication services such as set top boxes and modems (particularly to
larger corporate customers) and data centre services and other outsource
arrangements. Most rental contracts for retail outlets whether for individual
outlets, high-street locations or shop-in-shops in department stores are
likely to qualify as leases.
Q:
What might evidence a “right to control the use” of an asset?
A:
Right to control the use may be evidenced by the right to obtain
substantially all economic benefits – such as the exclusive use of specified
dark fibres.
Q:
What areas might affect the lease liabilities recognised?
A:
Contingent rent, renewal/purchase options and other services received
under the agreements might all affect the calculation of the lease liability.
Determination of the lease term might be a complex task; for example in
case of cell site leases, which may be affected by the useful life of the
mobile towers, technology changes or the term of the frequency licence will
affect the lease term.
Due to the large number of the lease agreements and embedded extension
options, measuring of lease liabilities may require significant effort.
Q:
What will be the impact of implementation on key accounting metrics?
A:
For lessees, the new accounting treatment will immediately affect a range
of key metrics monitored by stakeholders, including:
 EBITDA (increases as rental expense replaced by interest, depreciation
and amortisation)
 Operating free cash flow
 Net debt and gearing (increases as lease liability included in net debt)
 Net assets (decreases as the right of use asset amortises on a straight
line basis while lease liability is unwound more slowly in early years)
 CAPEX (increases as right-of-use assets are recognised on the balance
sheet)
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. © 2016 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is
a separate legal entity. Please see www.pwc.com/structure for further details.
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Q:
What are the wider potential business impacts?
A:
The new accounting treatment could affect a number of areas:
 Network development and network sharing agreements – agreements
previously classified as operating leases may be renegotiated to
minimize CAPEX and liabilities recognised.
 Communications companies have large asset bases and the resulting
increase in assets may increase the impairment risk often inherent in this
industry.
 Debt covenants – covenants might need to be renegotiated.
 Share-based payments– performance metrics might need renegotiation.
 Dividend policy – the revised profile of the profit or loss expense might
affect the ability to pay dividends.
 Lease negotiations – although accounting should not be the key driver in
commercial negotiations, market behavior might change towards shorter
lease tenures to minimize lease liabilities.
Q:
Will we need to develop an entirely new system to track and administer
leases?
A:
Many lessees currently manage operating leases on spreadsheets,
through the accounts payable system or through the network services
teams. Information needed to reassess lease terms and index-based
payments at each reporting date will now need extensive data capture.
Lessees might need to modify information systems, processes and internal
controls to comply with the standard.
Q:
How and when should I start a program to manage change and meet
compliance?
A:
Entities should take advantage of the long implementation period available.
An initial assessment of people, processes, systems, data, governance and
policy would be a good starting point.
Q:
What other departments other than accounting might be impacted?
A:
The tax department will need to assess how deferred tax liabilities might be
affected. The human resources department should consider whether there
are any effects on compensation metrics and policies.
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. © 2016 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is
a separate legal entity. Please see www.pwc.com/structure for further details.
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Contact us
Questions?
To have a deeper discussion, please contact:
Telecommunication Industry Accounting Group contacts
Territory
Name
E-mail
Telephone
London
Fiona Dolan
[email protected]
+44 20 7213 4885
London
Peter Hogarth
[email protected]
+44 20 7213 1654
London
Richard Veysey
[email protected]
+44 20 7212 1060
Paris
Matthieu Moussy
[email protected]
+33 15 657 8630
Frankfurt
Christoph Gruss
[email protected]
+49 699 585 3415
Düsseldorf
Thomas Tandetzki
[email protected]
+49 211 981 1105
Rotterdam
Jay Tahtah
[email protected]
+31 88 792 39 45
Amsterdam
Arjan Brouwer
[email protected]
+31 0 88 792 4945
Milan
Francesco Ferrara
[email protected]
+ 39 02 778 5525
Madrid
Vanesa Prieto
[email protected]
+34 915 684 826
Budapest
Gabor Balazs
[email protected]
+36 14 61 9534
Johannesburg
Helen Wise
[email protected]
+27 11 797 5293
Hong Kong
Sean Tuckfield
[email protected]
+852 2289 2368
India
Akhlesh Chowla
[email protected]
+ 91 22 6669 1216
Australia
Rosalie Wilkie
[email protected]
+61 2 8266 8381
Little Rock
Rob Glasgow
[email protected]
+1 973 236 4019
Toronto
Geoff Leverton
[email protected]
+1 416 815 5053
Authored by:
Fiona Dolan
Phone: +44 207 213 4885
Email: [email protected]
Gabor Balazs
Phone: +36 14 61 9534
Email: [email protected]
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors. © 2016 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is a
separate legal entity. Please see www.pwc.com/structure for further details.
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